EC Applauds Spain For Axing Investment Tax Break

by Ulrika Lomas, Tax-News.com, Brussels

05 June 2006

The European Commission has welcomed moves by the Spanish government to begin phasing out a tax regime favouring Spanish companies with overseas investments.

The Spanish tax scheme in question offers domestic companies a yearly tax credit of 25% of the amount invested to establish a foreign branch, to acquire a substantial shareholding in a foreign company and to explore or penetrate new markets (including in other Member States), provided such investments are linked to the export of goods or services from Spain.

The scheme also includes a temporary tax allowance totalling 25% of the expenses incurred to acquire control of an active business outside the EU, provided it is a new business venture unrelated to activities already exercised in Spain.

However, according to the EC, such incentives distort intra-community competition and violate EU state aid rules, which seek to ensure that governments do not unfairly subsidise certain companies or industries.

“I welcome the definitive abolition of these long-standing tax incentives, which seriously distort trade in the Single Market by granting unfair advantages to Spanish companies for their investments abroad," commented Competition Commissioner Neelie Kroes.

Under the terms of an EC recommendation issued in March, Spain will reduce the tax credit from 25% to 12% as of 1st January 2007. From 2008 onwards, the tax credit will be further reduced by 3% per year, until its complete elimination by 1st January 2011.

"Spain’s unconditional implementation of these measures immediately eliminates the scheme’s most harmful effects on trade and progressively reduces its intensity from January 2007 until its final suppression by the end of 2010," the EC stated.

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